This is a treacherous area for most business owners. The correct answer should not have anything to do with the sense of urgency or lack of urgency of the business owner. The correct answer is how long should an appropriate process take to sell a business?
This process should ideally start with proper succession planning. Proper succession planning includes ascertaining whether there is a path forward to transition your company to one or more family members or to existing employees. Both of these options should be thoroughly evaluated first. If either of these options can be achieved there is no need to take the company to the open market.
If going to the open market is the chosen path there should be plenty of time assigned for proper planning and preparation of the company’s financials, operating protocols, policy and procedure documentation and phasing back of the role of the owner(s) that will ultimately be departing.
Unfortunately, many times circumstances such as the following trigger a huge sense of urgency:
- Suddenly Declining Health
- Divorce
- Partner Breakup
- Cash Flow Crisis
- Lost Business
- Too Much Growth
Why is this topic so treacherous?
There are brokers out there that treat listing agreements like “hunting licenses”. They already know that they have a low likelihood of selling the company but they do have a “chance”. The more companies they can get under agreement the better they look and the more attention they will get from buyers. It is truly the blind hog syndrome.
The correct answer is that a high-quality advisor should be able to sell a company with quality earnings and transferrable value within ONE YEAR.
We always recommend that business owners never sign a listing agreement longer than one year. All listing agreements are exclusives. There is absolutely no reason to indenture yourself and your company for longer than one year. If there are extenuating circumstances both parties can always agreement to an amendment to extend for 60 or 90 days as appropriate.
Conversely, if you have learned that you made a bad decision and you are counting down the days until your listing agreement expires, you will be glad you only committed yourself and your company for one year.
There are brokers that will assert that their firm policy is a standard two-year contract. There is something inherent in every aspect of M&A. EVERY SINGLE THING IS NEGOTIABLE. This clearly includes the duration of the listing agreement and all other terms and conditions within the listing agreement. NEVER sign a listing agreement without an external legal review.
There are a lot of unscrupulous brokers that will put all kinds of “traps” in their listing agreements.
The best training I receiving in my career regarding contract administration was “prepare for the divorce while everyone else is preparing for the wedding”. In other words, don’t get stars in your eyes and convenient hearing. It is prudent to plan for a favorable outcome. It is also very prudent to plan upfront in case there is an unfavorable outcome.
When you sign a listing agreement you are clearly giving up an element of control over your company. Why would you do that for any longer than you absolutely have to?